Euro zone business recovery ends year on a high

By Jonathan Cable

LONDON (Reuters) - Euro zone businesses ended the year on a high as new orders surged, but the chasm between a resurgent Germany and wilting France has widened this month, surveys showed on Monday.

Markit's Flash Eurozone Composite Purchasing Managers' Index (PMI), which gauges business activity across thousands of companies large and small, rose to 52.1 in December from 51.7 last month.

It was the second-highest reading since mid-2011 and beat the median forecast in a Reuters poll for 51.9. The index has been above the 50 mark that denotes growth for all the second half.

However, survey compiler Markit warned that while the increase in growth was reassuring, the country-by-country breakdown of the data revealed a lopsided recovery, with France floundering and Germany steaming ahead.

"The rebound in the euro zone composite PMI in December makes for encouraging reading and may serve to sooth concerns about the sustainability of the recovery," said Martin van Vliet, senior economist at ING.

"But we should not get too carried away either - the still-low level of the overall index is a firm reminder that this recovery is still very fragile and sluggish."

The division between the euro zone's two biggest economies was marked.

The French composite PMI fell to a seven-month low of 47.0 and signalled a steady contraction in activity, while the same measure in Germany showed a solid expansion to 55.2.

Markit said the data suggested the euro zone economy, which escaped from its longest-ever recession earlier this year, would grow around 0.2 percent this quarter, in line with a Reuters poll published last week.

New orders rose for the fifth month, suggesting the recovery should continue into 2014.

German government bonds pared an early rise on Monday the data.

MANUFACTURING CHEER

Markit's Eurozone Manufacturing PMI rose to 52.7 in December from November's 51.6. That was its best showing in 31 months and smashed median expectations for 51.9. It was higher than all forecasts in a Reuters poll of 35 economists.

A gauge measuring manufacturing output soared to 54.8 from 53.1, a level not seen in more than 2-1/2 years.

As new orders for manufactured goods grew, factories were able to build up a backlog of work at the fastest pace since April 2011.

"This is very much a manufacturing-led recovery. It's reflective of companies, especially in Germany, being more competitive and taking advantage of the upturn in global trade," said Markit's Williamson.

The PMI for the services sector, which makes up the bulk of the euro zone's economy, dipped to 51.0 from 51.2, confounding expectations for a rise to 51.5.

Services firms were forced to cut prices again last month, as they have done for the last two years, to drum up business.

Official data due on Tuesday is expected to confirm prices rose across the 17 euro using nations by just 0.9 percent in November - well below the European Central Bank's 2 percent target ceiling.

"We cannot rule out the possibility that the ECB will be forced to take further action next year to tackle the ongoing disinflationary pressures across the region," said ING's Martin van Vliet.

The ECB surprised markets last month by chopping its main refinancing rate to a record low of 0.25 percent and while it is not expected to cut them again, it may flood markets with another round of cheap cash early next year.

(Additional reporting by Andy Bruce, Editing by Hugh Lawson/Jeremy Gaunt)